Private equity firms last year increasingly pledged to pay break fees if they backed out of an acquisition, suggesting a need by buyout firms to assure concerned sellers that they would complete a deal during volatile markets.

Traditional break fees are usually paid by vendors to cover due diligence costs should the seller pull out of a pending deal.

However, reverse break fees – which are paid by a buyer when it backs out of a deal – were included more frequently by private equity firms, according to a new report by Thomson Reuters.

According to findings from the study, 'M&A Trends and Insights for Lawyers', among public M&A deals with private equity acquirers, 78% employed reverse break fees, up from 53% in 2010.

The study said that this was because deals took longer to complete in 2011 and deals faced greater regulatory challenges, while wider macroeconomic uncertainty made them more difficult.

Among the major global M&A deals that saw the use of reverse break fees last year was AT&T’s failed attempt to acquire T-Mobile from Deutsche Telekom AG, which was triggered by the buyer’s failure to obtain regulatory approval.

Thomson Reuters said that global M&A tilted towards the “more contentious and complex” in 2011, compared to 2010, according to its Accelus Hostility Index. The index takes into account hostile deals, withdrawn deals, the time taken to complete deals, and a measure of deal complexity.

Reverse break fees were popular in public deals involving both private equity buyers and other strategic buyers, as acquirers sought to mitigate against potential stumbling blocks during deal negotiations, using the fees to reassure vendors as they entered negotiations. The fees usually account for a small percentage of a potential acquisition cost. Previously, the standard break fee in the UK was 1% of the value of the deal.

The findings of the study follow changes to the UK’s takeover code, implemented in September last year, which banned the use of break fees in UK public M&A in all but limited circumstances. The changes enforced by the Takeover Panel were made in an attempt to make hostile takeovers more difficult following US food group Kraft’s controversial acquisition of UK chocolate maker Cadbury in 2009. The rise in reverse break fee usage is likely to be stopped due to the changes.

Under the new rules, an unsuccessful bidder is left with a substantial bill for financing and advice that it will not be able to offset with a break fee. Thomson Reuters described the Takeover Code changes as a “sea change” in UK M&A.